Why policy fixes won't work: The middle class needs a bigger piece of the pie.
Government wants to give more loans to business, but the problem is consumers. They can't afford to consume until they get a bigger share of the economy.
Two television networks, seen in the Goldman Sachs cubicle on the floor of the New York Stock Exchange, broadcast the news that the Federal Reserve left rates unchanged in their final meeting before the mid-term elections, Tuesday, Sept. 21. Stock prices, which had been relatively flat before the Fed's statement, rose afterward, propelling the Dow up 60 points within minutes.
Henny Ray Abrams / AP
Fiscal policy is deadlocked. So, apparently, is monetary policy.
The Fed鈥檚 decision today (Tuesday) to keep short-term interest rates near zero is no surprise. What鈥檚 odd is its apparent decision not to boost the economy by buying hundreds of billions of bonds 鈥� despite its acknowledgment that 鈥漷he pace of recovery in output and employment has slowed in recent months,鈥� and that prices are rising too slowly for comfort (i.e., we might be facing deflation).
Every indicator suggests third-quarter growth will be as slow if not slower than in the second quarter. Consumer confidence is down. Retail sales are down. Housing sales are down. Commercial real estate is in trouble.
A growth rate of 1.6 percent means even higher unemployment ahead. Maybe we鈥檙e not in a double-dip but we might as well be in one. Growth this slow is the equivalent of heading downward, relative to the growth needed to get us out of the hole we鈥檙e in.
The Fed is deadlocked because it harbors hawks who worry near-zero interest rates will lead to another round of speculation, ending in an even bigger bust. Kansas City Fed President Thomas Hoenig, for example, is openly dissenting from the Fed鈥檚 near-zero policy and I鈥檓 sure he resists doing anything more to stimulate borrowing.
I don鈥檛 generally side with the hawks but they have a point.
Even though economy is heading downward, flooding it with more money may not help.
The problem isn鈥檛 the cost of capital. Most businesses can get all the money they need. Big ones are still sitting on $1.8 trillion in cash.
The problem is consumers, who are 70 percent of the economy. They can鈥檛 and won鈥檛 buy enough to turn the economy around. Most don鈥檛 qualify for more credit given how much they already owe (or have already defaulted on).
Without consumers, businesses have no reason to borrow more. Except to speculate by buying back their own stock and doing mergers and acquisitions, which is exactly what they鈥檙e doing.
Ultimately, even if fiscal and monetary policy weren鈥檛 deadlocked, we鈥檇 still face the same conundrum. Say the White House and Ben Bernanke got everything they wanted to boost the economy. At some point these boosts would have to end. The economy would have to be able to run on its own.
But it can鈥檛 run on its own because consumers have reached the end of their ropes.
After three decades of flat wages during which almost all the gains of growth have gone to the very top, the middle class no longer has the buying power to keep the economy going. It can鈥檛 send more spouses into paid work, can鈥檛 work more hours, can鈥檛 borrow any more. All the coping mechanisms are exhausted.
Anyone who thinks China will get us out of this fix and make up for the shortfall in demand is blind to reality.
So what鈥檚 the answer? Reorganizing the economy to make sure the vast middle class has a larger share of its benefits. Remaking the basic bargain linking pay to per-capita productivity.
Let me end with a brief commercial. My new book, 鈥淎ftershock: The Next Economy and America鈥檚 Future鈥� is out today. In it, I explain this in detail.
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